How Big Is Big Enough?
There used to be one fairly safe assumption you could make about Inc. 500 companies: They were committed to getting as big as they could as fast as they could. Granted, they all faced constraints of one sort or another -- limited access to capital, shortages of qualified people, insufficient cash flow, whatever -- but their common desire to become bigger companies was never in doubt. Not anymore. This year's Inc. 500 includes a small group of businesses that have already applied the brakes.
Consider the Works Corp., an Internet retailer based in Boise, Idaho, that has chalked up average annual sales growth of 208% since 1999, landing at No. 158 on the 2004 list. Founder and CEO Bruce Goode says he is happy to make the Inc. 500, but he really doesn't want the company to get much bigger. Right now he has six full-time and two part-time people on staff, and he believes that's just about the right number. "I may add one person in the next couple of years," he says, "but that's it. I don't want to get big."
Robert Catlin of Signature Mortgage (No. 459) in Canton, Ohio, feels pretty much the same way. He's developed a system that allows his 16 employees to outperform mortgage lenders with three or four times as many people, and there's no reason to believe that the approach wouldn't be just as effective in other midsize markets around the country. But Catlin isn't interested in expanding. "People tell me all the time, 'You're crazy, pal. You're missing a golden opportunity," he says. "I say, 'Hey, I'm doing just fine. I have control. I have freedom. I have family time and travel time. What more can I ask for?"
Then there's Robert Moore, the co-founder and CEO of Solid Earth (No. 308) in Huntsville, Ala., which provides an Internet-based multiple listings service to real estate agent associations. He and his partner have decided to restrict growth by taking on only four or five new associations per year. To do more, they'd have to expand their 11-person work force -- something they don't want to do. "There's definitely an advantage to having a small team that's devoted, well paid, and happy," Moore says. "I don't think I could get the same level of commitment from a larger group."
These three entrepreneurs are hardly representative of this year's Inc. 500 CEOs. Frankly, it's surprising to find them in that group at all. Their businesses challenge a fundamental belief we've long held about Inc. 500 companies -- namely, that they are engines of job generation. And their founders, it turns out, aren't the hard-charging, sales-obsessed workaholics we often assume entrepreneurs must be in order to build companies capable of growing fast enough to make the list.
The question is, are they an aberration or the leading edge of a trend? Over the years, we've noted changes in the profile of the typical Inc. 500 CEO. Companies that made the list in the 1980s were generally founded and led by self-taught, street-smart entrepreneurs who loved the adventure of building a business. In the 1990s, we saw the emergence of professional entrepreneurs, many of them with M.B.A.'s, who had often gained experience working for large companies and started their own businesses with the goal of going public or getting acquired. It's too soon to say with any confidence that Goode, Catlin, and Moore are harbingers of the next generation of Inc. 500 CEOs, but we may be able to discern clues about the shifting priorities of company builders by looking at the paths that led them to decide they needed to moderate their companies' growth.
For Bruce Goode of the Works Corp., it was a lifestyle decision. A recovering workaholic, he says he has more or less taken the past year off. He's learned how to fly an ultralight airplane and how to carve totem poles with a chain saw. He and his wife, Jody, have gone kayaking in Alaska and taken cruises to Mexico and the Bahamas. He has bought 40 acres of timberland in the mountains north of Boise and remodeled a 100-year-old log cabin on the property.
Not that he ignores his business. He puts in about 30 minutes a day dealing with company matters by telephone and Internet, and he drops by the office a couple of times a week -- "to say hi," he says -- when he's in town. In addition, he spends a considerable amount of time investigating new ventures that the Works Corp. -- which distributes home and garden products through several hundred websites it owns -- might pursue in the future.
For the moment, at least, Goode is content. "We've hit a number where we can make enough money to live very comfortably and travel, and everybody's happy," he says. "Too much growth could screw it up."
He didn't always hold that view. Goode used to work long days and long weeks. He and Jody owned a small garden center in Boise. About 10 years ago, Goode began putting up websites in an effort to sell garden products during the winter to people in other parts of the country. He was so successful that he kept expanding his online product offerings and adding websites until finally it dawned on him that he and Jody really didn't need the store anymore. "The few minutes a day we could get away from people in the store asking questions about $9 items, we could go online and sell $1,000 items," Goode says.
At about the same time, he and Jody began questioning their entire approach to business. "We were working like dogs," he says. "Sometimes I'd work all night putting up sites. I was getting burned out, and I was completely out of shape sitting there eating at the computer all day. I began realizing I was a prisoner of the business. We said to ourselves, 'There's got to be more to life than trying to make as much money as possible whether you can spend it or not.' What we really wanted was freedom. So we completely changed our way of thinking -- from having our whole life be about building the business to having the business be a way to sustain the kind of life we wanted."
That meant, among other things, closing the garden store. "We had a really good niche market here," Goode says. "But we realized we could do even better if we shut down the store and concentrated on the Internet. That would also give us freedom to go camping or take a vacation. We hadn't had one in seven years." First, however, they had to hire some employees and build a team.
The team is indeed a key component of each of these companies. The CEOs all credit their success to having a small, cohesive, committed work force. It is precisely the effectiveness of their teams that the CEOs fear might be lost if the companies were to grow too fast.
Goode's team consists of a webmaster, an office manager, and six other people whom he trusts implicitly to run the Works Corp. while he's away. He says he feels lucky to have found them. He strives to treat them as partners rather than employees, a word he has banned at the company. For example, everyone, including Goode and his wife, is paid a base salary plus a percentage of monthly revenue above a certain threshold. This year that amount is $175,000 per month. The percentage a person gets increases with each year of service. If revenue is less than $175,000 in any given month, no one gets revenue sharing. In addition, there are bonuses whenever the company has monthly sales higher than it had in the same month the year before.
As for increases in base compensation, they are determined not by individual performance but by the achievement of company goals. Thus, everyone gets a raise of 50 cents an hour when Goode is able to fulfill a goal he set for the company, such as buying an apartment complex. (Goode wants to acquire two.) When the company pays off what it owes on the timber property up north, everyone will get a $1-per-hour raise. The idea, Goode says, is to eliminate the confusion and misunderstanding surrounding decisions to grant wage increases. If there are no raises in any given year, everybody knows why. In the same egalitarian spirit, the cabin on the timber property is available for use by anyone in the company. Meanwhile, Goode is subdividing the property into lots that he will give to people when they reach their 10th anniversary with the Works Corp.
A skeptic might question whether such measures can really break down the traditional walls between employer and employees. After all, there is still one major difference between Goode and the members of his team: He's an owner and they're not. Nevertheless, he says, the people at the Works Corp. feel, think, and act as if they own the company, and that esprit de corps is what he thinks he would jeopardize by bringing in a lot of new employees.
Robert Catlin of Signature Mortgage also relies on a small, tight-knit team, consisting, in his case, of 16 employees. "When you're small, you can do all kinds of things that build relationships and create a tremendous amount of loyalty," he says. But in contrast to Goode, his decision to stay small had to do less with lifestyle than with efficiency. Formerly a vice president of another Inc. 500 mortgage company, Rock Financial, he'd concluded that a "little power group" of 14 to 16 employees could accomplish as much as a company with 50 to 60 employees, provided he got the right people and created the right environment for them to work in.
So Catlin went out and hired people he'd known, in some cases, for more than 20 years. Several employees are his golfing buddies. Every year he takes the entire team -- together with husbands, wives, and significant others -- on a retreat. In recent years, they've been to San Diego, Las Vegas, and the Dominican Republic. He also pays well. He has clerk-typists with a high school education who earn up to $60,000 a year, including bonuses. The bonuses are tied to productivity, which is extraordinary across the board. Last year, Signature originated more than $18.4 million in mortgage loans per employee, far above the industry average. "You get so much more out of people when you keep it intimate," says Catlin. "I take that for granted, and I shouldn't because I see how the big companies flounder."
The payoff for Catlin is freedom. He says he can go away without having to worry about the work getting done or the cash disappearing. Last year, he took 10 weeks of vacation, and he's no slave to the office when he's at home, either. He says he has plenty of time for his outside interests, like coaching his sons' baseball teams. "If I were to expand the company, I might make an extra few hundred thousand dollars, maybe even a million, but is it worth it?" he says. "You lose part of your life to growth."
Robert Moore of Solid Earth, the MLS provider, reached the same conclusion as Catlin and Goode -- to moderate growth and keep the team small -- but he took a completely different route to get there. For him, the key consideration was his company's ability to provide a high level of ongoing customer service. In the beginning, he and his partner, Matt Fowler, weren't particularly aware of the connection between size and service quality, but they soon learned. A few of the real estate associations they signed up insisted that Solid Earth provide direct support to local agents. As a result, the company's highly paid tech experts found themselves doing basic training for people who'd never used a computer before. "We realized that we can't and shouldn't do end-user support," says Moore. "We're a technology provider. We expect our customer, the association, to provide support to the end users, its members. An association with a strong support staff can offer better service to them than we can. So now we turn away customers that want us to do the end-user support for them."
In addition, Moore and Fowler began to realize that it didn't pay to take on small associations. Although the cost of implementing the system was the same regardless of the association's size, the potential revenue could vary greatly. Even more important than the money was the time involved in setting up a new system. The more time Solid Earth's staff spent on new customers, the less time it had to take care of old customers, most of whom were on three-year contracts. If they were happy with the service they received during those three years, they would renew for five years at no additional cost to Solid Earth. If they weren't happy, they would leave, and the company would have to sign up additional accounts -- at considerable expense -- just to stay even in sales.
So it was vital that the staff have whatever time it needed to maintain a high level of service to old customers, which meant limiting the number of new customers. "We didn't want the growth to kill us," says Moore, "and we didn't want to be the cheap guys in the market. We wanted to be viewed as the guys you go to when all else fails." In effect, the partners decided to position Solid Earth as what Moore calls "the Ferrari of the industry."
There was, of course, an alternative. Moore and Fowler could have hired more people. Yet they never seriously considered the possibility. "I've always found that having a small team works out better in terms of morale, motivation, and productivity," says Moore. "We have a pretty flexible work environment here, but if there's trouble, everybody is available 24 hours a day until we get the problem solved. And there's no bureaucracy. That's why we're able to win whenever we compete against large companies."
That's the common thread among these three fast-growing (and, by the way, highly profitable) companies that have decided to moderate their growth.
Although the decisions were driven by different considerations in each case, a key factor for all of them was the remarkable level of commitment -- and performance -- that a very, very small team can deliver. A labor shortage wasn't the problem. They all could have expanded their work force if they had chosen to. What stopped them wasn't a dearth of qualified people, but rather a preference for keeping the number of employees in the low two digits or less.
That's a choice many people can't understand. "The hardest part is dealing with people telling me I'm crazy," says Catlin, of Signature Mortgage. "The world says, 'Go. Get bigger. Go. Go.' But I know a lot of companies that get too big for their britches and fall flat on their face."
To be sure, there are many companies that grow fast and do just fine. Still, the decision to stay small may well resonate with entrepreneurs seeking a better quality of life and a higher level of customer service. If so, we may someday look back on the likes of Goode, Catlin, and Moore as pioneers rather than odd men out. Will that mean we won't be able to count on growth companies to create jobs? Not necessarily. There will always be people who seek to build the next Microsoft. But if this approach catches on, we may start seeing more small, happy, high-paid teams -- and well-balanced, unstressed CEOs.
Editor-at-large Bo Burlingham is writing a book about great companies that limit their growth.